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A Carbon Dividend?

Posted by: John Carey on January 10, 2008

In the last year, the political winds on climate change have shifted dramatically. A cap on the emissions of carbon dioxide and other greenhouse gases is now widely seen as inevitable. But that just leads to another huge debate, over how the required reductions will be achieved. And into this debate comes an interesting new idea, a carbon dividend.

Imagine that legislation requires emissions to be cut 20% by 2020 and 80% by 2060. Getting there means that caps have to be put on each

sector of the economy and each industry. Or in other words, each sector and industry will have the right to emit only a certain amount of greenhouse gases.

Those rights are obviously valuable. The first question is whether those rights should be given to industries or auctioned off. The former--the handout--would result in a huge windfall to those companies (since the right to emit carbon would be worth a tidy sum, estimated to be between $10 and $100 per ton, depending on the overall cap). The latter—the auction—would raise the price of energy and goods, hitting consumers' pocketbooks to the tune of hundreds of billions of dollars. But the auction would also bring in hundreds of billions of dollars.

From an economic point of view, the auction is a better solution. And indeed, presidential candidates like Hillary Clinton, Barack Obama, and John Edwards favor that approach.

But what would be done with the money? The usual idea is to use a big chuck the pay for incentives or direct subsidies for new cleaner technologies, or even to help Detroit retool to make more fuel-efficient cars. But there’s a potentially better approach, being pushed now by Peter Barnes, founding director of a small think tank called the Tomales Bay Institute.

Barnes’ idea is to hand the money equally to all Americans as a dividend, much like the regular checks that Alaskans get from the state’s oil revenue.

Barnes figures that the money isn’t needed to boost new technologies. After all, the higher prices for fossil energy (caused by the cost of carbon emissions) will make wind, solar, and other sources of power competitive without added subsidies. And returning the money to Americans can start what economists call a virtuous cycle. On average, each American will get back about as much as he or she has to shell out because of the price of carbon. But those who change their lives to use less energy will pay less, while still getting the same dollars from the government. That's a powerful incentive to be even more energy efficient. “Those who conserve are rewarded, while guzzlers pay more,” says Barnes.

Will the idea fly? It has a tough road ahead. Even if Washington puts in a cap and auctions off the permits, the temptation to keep the money and use it for pet programs is huge. But it is an idea that should be on the table.

Reader Comments

Don Holden

January 11, 2008 9:27 AM

Taxing American industry for the the amount of carbon dioxide emitted will make them less competitive in the global market resulting in fewer jobs and higher costs to consumers. The amount collected by the government will be a windfall to be distributed to those with the most political weight after deducting the cost of adding a new bureaucracy to administer this. Did we forget the political fights in the 70's when we tried to ration the supply of oil and made what was just a 5% shortage into a major disaster?
Let's be certain that carbon dioxide has been a significant contributor to global warming and that global warming is really happening. Hundreds of climatalogists and astrophysists believe otherwise but the media only mentions the pro global warming stories and the global warming advocates refuse to debate this.

Barak O'Clinton

January 11, 2008 9:48 AM

Our government has proven time and again that tax payer dollars are only are only spent wisely by the tax payers themselves. (p.s. this is coming from a democrat)

Hurray for fiscal discipline!!

Adam Aston

January 14, 2008 11:45 PM

Worth checking out: Over at Gristmill (link 1, below), a leading green issues website, there’s a smackdown underway between their resident climate-change policy geek, Joseph Romm (a noted scientist in his own right, see his wikipedia entry (link 2, below)) and Peter Barnes, author of the carbon dividend proposal my colleague John points to above. In an extended to-and-fro, Romm dismantles Barnes’ proposal, contending that, absent more directed policies encouraging energy efficiency and other forms of new green investment, high carbon prices alone cannot achieve the sort of emissions reductions we need, no matter how efficiently auction proceeds are recycled back to tax payers. Barnes points that voters are likely to be deluged by a wave of chatter on this topic in coming months, as presidential elections heat up and various industry factions try to scare voters away from the prospect of a carbon tax. All the more reason to digest this debate and form your own opinion.



January 17, 2008 2:15 PM

Great idea- it's incredibly important to protect consumers, especially those at the bottom.

Why would Obama or Clinton want to fund tech by essentially raising taxes on the working & middle class?

Jonathan Teller-Elsberg

January 18, 2008 9:45 AM

Up front admission: I work for Chelsea Green Publishing, publishers of Peter Barnes' new book CLIMATE SOLUTIONS, which explains his ideas further, comparing and contrasting the "cap-and-dividend" model against traditional cap-and-trade, carbon tax, and regulation based policies.

Okay, so that said... one correction to John Carey's posting. Whether or not emissions permits are distributed for free to industry or auctioned off, prices will increase for consumers. That's part of why a giveaway would turn into a "windfall" for industry--the fact that use of fossil fuels would be restricted would induce a rise in prices on products but industry would not have had to pay anything for the emission permits. The windfall would be the transfer of consumers' cash into the hands of the businesses. So consumers will be squeezed either way (just as they will be squeezed if there's a carbon tax). But an auction of permits and dividend of the revenues to the population would be a real cushion for consumers to ease the blow of rising energy costs. In fact, as Barnes notes in the book, roughly 2/3rds of the population would actually come out ahead under such a program, because they consume less than the average amount of energy (directly and indirectly).

Regarding Don Holden's comment--and ignoring his discounting of the reality of global warming since the debate has been open and ongoing in the scientific community for several decades and the naysayers, who started out ahead, have now been convincingly shown wrong--it would be easy to impose carbon-import tariffs (as Europe is already considering, reported elsewhere in BusinessWeek). This would even the playing field for American industry, thus protecting domestic production and workers, while also adding pressure on the rest of the world to implement equivalent policies to control carbon emissions. (The tariff would only apply to imports from countries that don't have a carbon restriction policy in place.)


February 13, 2008 11:55 PM

Great article, we are studying this same footprint right now and debates range from forestry models to "doesn't matter in my lifetime". What about carbon credits for businesses or public ownership??

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BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.

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